Bridging the Gap: The next generation of ICOs will issue neatly regulated cryptosecurities
For a while, it sounded like ICOs were too good to be true. Entrepreneurs could raise millions with very loose commitments to their investors. A couple of software programmers could hit the jackpot with a whitepaper promising the next Ethereum. Predictably, financial regulators put an end to the party, categorizing most tokens as securities.
But this is not the end of ICOs as a means to raising capital: The benefits of raising funds by using blockchain tokens are huge, and governments recognize this. While the role of financing regulators is to protect investors and ensure the efficient functioning of financial markets, it doesn’t mean that they don’t understand the potential of the blockchain, rather the opposite is true.
Being able to invest in a company via a blockchain transaction, instead of doing it via private agreements or going the IPO route is a game changer.
The costly work of processing transactions and assessing ownership can be done fast and cheap on the blockchain, instead of relying on a cottage industry of costly intermediaries, such as notaries, brokers, or investment banks. This lowers the cost of capital and makes fundraising much easier for startups and established companies alike. That’s good for the economy.
In Switzerland, where Tokenestate.io operates, the national regulator FINMA has gone to great lengths to clarify the rules applying to token issuance, and to help companies to legally issue cryptosecurities. Indeed, in Switzerland it is possible to raise capital by issuing a standard bond or share, what ENVION AG or TEND have recently demonstrated.
So, what we’re seeing now is the emergence of new ways to raise capital on the blockchain in a compliant fashion, by issuing securities (i.e. debt or shares) whose ownership is intermediated by the blockchain (i.e. cryptosecurities or security tokens). That’s what we call ICOs 2.0 — the second generation of more mature ICOs arising after the initial hype.
ICO 2.0 consists of selling regulated securities, whether debt or shares. Most importantly, such instruments request their issuer to disclose certain information which is key in assessing the investment opportunity: The company’s business, financial statements, biographies of officers, to name but a few. Typically, this information is made available to investors in a document called a prospectus. The purpose of the prospectus is to provide a level playing field to all investors, ensuring they all have access to the same information.
Another very important point is the compliance with Anti Money Laundering (AML) regulation, also known as Know Your Customer (KYC). It is a set of processes obliging the issuer to verify the identity of its investors and match it against lists of Politically Exposed Persons (PEP), and to prevent money laundering or terrorist financing.
The complexity in issuing cryptosecurities stems from the fact that the regulation varies depending in the geography considered.
Prospectus requirements are not the same in different countries. Some regulations have clearly defined rules: The US for example, allows securities tobe sold relatively easily on a cross-border basis to accredited investors. The EU on the other hand enables an issuer to make an offer to a maximum number of investors per member state. In other geographies, the interpretation of local regulation is more complex. Because prospectuses are written and cleared by law firms, they don’t come cheap.
In addition to the high costs of issuing a prospectus, there are no trading venues for cryptosecurities available today. That makes the organized secondary trading of cryptosecurities impossible.
Our view at Tokenestate.io is that these complexities are a gaping market opportunity for companies pursuing a compliant approach to the offering and trading of cryptosecurities.
Specialized service providers and trading venues are now required to issue cryptosecurities at scale, and to realize the promise of the blockchain. A number of companies are already working on building cryptosecurity issuance platforms (Polymath, Securitize, Prometheum, Templum) or cryptosecurity trading venues (LYKKE, GBX).
We at Tokenestate.io are building an integrated cryptosecurity issuance and trading platform dedicated to the largest asset class in the world: Real estate.
Because today, it is too costly to invest in real estate, as there are many inefficiencies in the market. There is an urgent need to ‘tokenize’ real estate, to issue cryptosecurities representing share or debt in real estate funds.
We’re developing a platform which will offer compliant Tokenization-as-a-Service (TaaS) to real estate funds, and a trading platform which will list carefully vetted and transparent real estate tokens to institutional and individual investors alike.